Dubious practices, ‘profiteering’ taint Indonesia’s bid to regulate online lending

Update (April 24, 1:00 pm): Added comments from AFPI and OJK.

Update (May 5, 9:00 am): Added further comments from AFPI and OJK.

In Indonesia, more than a hundred online lending startups are vying for consumers who are underbanked and have little access to credit. But in the industry’s early days, government regulations had to play catch up.

Last year, incidents around unethical collection methods plagued the industry. In a high-profile case, a taxi driver hanged himself due to a “devil’s trap” of debt from illegal fintech firms.

Since then, regulatory oversight – including the process of getting a permanent online lending license – has become more stringent.

The OJK headquarters in Jakarta / Photo credit: Wikimedia

But sources Tech in Asia spoke to suggest that there’s a lack of transparency over the licensing requirements and process. They talked about the “profiteering” behavior of vendors appointed by the online lending division of Otoritas Jasa Keuangan or OJK, Indonesia’s financial services authority. They also alleged conflicts of interest between OJK and Asosiasi FinTech Pendanaan Bersama Indonesia (AFPI), the industry association for online lenders.

These issues cast doubt on OJK’s effectiveness and ability to police the peer-to-peer lending sector, which is seeing more activity from both local and foreign players, especially China-backed companies. The Covid-19 pandemic will likely bring added pressures, with more people defaulting on their loans.

However, when Tech in Asia reached out to OJK for comment, it contended that everything it does “puts forward procedural and governance aspects,” according to a spokesperson. “If there is input from the public, it can be submitted to OJK’s whistleblowing system. We will seriously follow up on accurate data and information.”

Inefficient, “profiteering” vendors

Getting registered is the first step to securing a license from OJK. The regulator closes down unregistered companies – OJK claims that 2,406 of these firms have been shuttered between 2018 and March 2020.

According to OJK regulations, a registered company has one year to gain a full license. In the meantime, it can largely operate the same way as fully licensed companies.

But here’s the rub: only 25 companies have managed to obtain that license since the first one was granted in mid-2017.

Another 136 are still registered, with 59 of them for more than one year. A company will lose its registration status after that time, according to OJK rules.

AFPI clarifies that as long as a company has submitted the application within the one-year deadline and has not been rejected, it can continue operating.

Conflicts of interest

China as a cautionary tale